In a significant decision for the offshore construction market, in Technip Saudi Arabia Limited v The Mediterranean and Gulf Insurance and Reinsurance Co [2024] EWCA Civ 481, the Court of Appeal has confirmed the correct interpretation of the Damage to Existing Property ("DTEP") exclusion, which appears in the standard form WELCAR 2001 Offshore Construction Project ("WELCAR") wording.
The WELCAR wording is widely used for offshore construction all risks insurance cover and, as the first occasion that a dispute involving the exclusion has been heard by the courts, the decision provides useful clarity, as well as an important reminder on the need for consistent drafting.
Background
Technip Saudi Arabia Limited contracted with Al-Khafji Joint Operation ("KJO") to carry out construction works to offshore assets in an oil field owned by KJO. The works were covered by an offshore construction all risks insurance policy, under which Technip was named as an insured.
Unfortunately, during the course of the works, Technip's vessel allided with an unmanned platform belonging to KJO, causing significant damage. Technip paid KJO $25 million in respect of the damage and then claimed an indemnity under the all risks policy. However, the insurer declined cover by reference to the DTEP exclusion.
The insurance policy
The policy was written using amended WELCAR wording, which is the standard form for offshore construction all risks cover. As is often the case, it incorporated an "existing property endorsement" (the "DTEP exclusion"), which stated that cover for damage to existing property "shall not apply to any claim for damage to or loss of use of any property … which the Principal Assured … owns that is not otherwise provided for in this policy…". A buy-back provision then disapplied the exclusion for specified property, but not the damaged platform.
"Principle Assured" was not defined in the policy, but was used interchangeably with "Principal Insureds", a defined term which included Technip, KJO, their affiliated companies and various other parties. The policy also referred to "Other Insureds", which included project managers and sub-contractors.
First instance decision
Technip asserted that the wording "any property [for] which the Principal Assured…owns" was limited to property owned by the particular insured claiming under the policy. As the damaged platform did not belong to Technip, it contended that the DTEP exclusion did not apply.
That argument failed at first instance. Applying the normal principles of contractual interpretation, Jacobs J held that the DTEP exclusion should be construed as excluding damage to property owned by any of the insureds named in the policy, rather than just the specific party making the claim.
However, Jacobs J granted Technip permission to appeal this short point of interpretation, primarily due to the importance of the WELCAR wording to the offshore industry.
Court of Appeal Judgment
Technip advanced three grounds of appeal:
1. The judge failed to give adequate weight to the primacy of the policy language
The Court of Appeal accepted that the DTEP exclusion had more than one possible meaning and that the policy was "not a model of clear drafting", noting, in particular, the mix-up in terminology between Principal Assureds and Principal Insureds.
Ultimately, it concluded that Technip's interpretation of the DTEP exclusion was inconsistent with other language used in the policy and did "far more violence to the natural meaning of the words", than the insurers' interpretation. To make sense, Technip's interpretation would have required reading the exclusion as if it included the words "property [for] which the Principal Assured [which is making the particular claim concerned]…owns", whereas the insurer's interpretation simply required reading "Principal Insured" in place of "Principal Assured". Further, Technip's interpretation would not make sense if the claim was made by an "Other Insured".
2. The judge failed to give effect to the composite nature of the policy
As the policy was expressly "deemed to be a separate insurance for each Principal Insured", Technip asserted that the property referred to in the DTEP exclusion must be that solely belonging to Technip and argued that the authorities demonstrate that composite policies are always interpreted in the way it contended.
However, the Court of Appeal did not agree. The "fatal flaw" in this argument lay in the fact that the Court had already decided that "Principle Assured" imported the definition of "Principal Insureds". Accordingly, the "Principle Insured" meant Technip and/or KJO and/or the associated companies and the composite nature of the policy could not change the meaning of those terms. Therefore, it did not change what property was defined as being included within the DTEP exclusion.
3. The judge allowed his perceived commercial rationale to override the natural meaning of the DTEP exclusion
Finally, the Court of Appeal rejected Technip's argument that Jacobs J had paid excessive regard to the commercial rationale of the DTEP exclusion. The clause was intended to exclude claims for damage to property, either owned by or in the custody of the Principal Insureds, or for which the Principal Insureds were liable, unless that coverage was specifically brought back for specified property.
The Court of Appeal accordingly rejected all three grounds of appeal and Technip's claim was dismissed.
Conclusion
This judgment highlights the weight that the courts place on applying the natural and ordinary meaning of the words used when interpreting exclusion clauses and its reluctance to "do violence to the language" by modifying or adding to it. It is also a reminder of how critical clear drafting is and the problems that can be caused by inconsistent provisions.
Meanwhile, for parties operating in the offshore construction industry, the decision is a warning of the need to ensure that all property intended to fall within the scope of cover is properly identified and, where necessary, bought back.